What's Behind The Fall of Solar Energy Stocks?

Solar stocks are down, but is that reason to panic -- or a time for investors to buy?

Travis Hoium
Travis Hoium
Aug 26, 2015 at 4:05PM
Energy, Materials, and Utilities

Stocks all over the solar industry have been hammered in 2015. Solar panel makers, project developers, and everyone in between have seen stocks crumble this year. What's going on with solar stocks, and is now the time to buy? 

FSLR Chart

FSLR data by YCharts

Why solar stocks have crumbled this year
A number of factors are working against the solar industry this year. Oil prices have remained stubbornly low, which, despite the fact that they're not direct competitors, has affected solar stocks. 

The threat of higher interest rates, which would lead to lower returns for solar projects, has also threatened companies' potential for expansion. Debt investors have demanded higher rates of return from SunEdison (NASDAQOTH:SUNEQ) and SolarCity (NASDAQ:SCTY.DL), two of the most active solar companies in the debt markets, and that has to be a little concerning for the industry. 

A third risk that investors are starting to realize is that utilities are starting to learn how to fight third party solar and instead develop it themselves. Challenges to net metering in Arizona, Nevada, and California threaten the enormous growth in solar over the past few years, and companies banking their futures on those states -- like SolarCity, which has 75% of its customers in just five states -- could be in for a rude awakening. 

Reality sets in for solar investors
The other thing that investors are realizing is that many solar companies are in need of billions of dollars in funding just to live up to their growth potential. SolarCity and SunEdison, in particular, are issuing billions of dollars of debt to build projects. This leaves them highly exposed to rising interest rates and the potential that investors will cut off funding in the future. The solar industry may be growing like a weed, but it takes capital to put those projects in the ground. 

SCTY Net Change in Long Term Debt (TTM) Chart

SCTY Net Change in Long Term Debt (TTM) data by YCharts

On the flip side, First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) are barely changing their debt loads, using a more conservative strategy and selling a portion of their panels and projects to third parties. It's a strategy that will lead to slower growth, but it also reduces the difficulties associated with funding projects. The downside for them is that the yieldco 8point3 Energy Partners has dropped from an IPO price of $21 per share to below $15 as of this writing, meaning it may not be able to buy projects at the rate it expected if shares don't turn around. 

Image: First Solar.

The general realization that solar companies will need more and more funding, whether that's in the form of debt or equity, has hurt solar companies recently, and it's exacerbating a general sell-off in markets and energy stocks. 

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Is now the time to panic?
What times like this solidify to me is why investors should buy stable, profitable solar companies with long-term competitive advantages. Relying on companies that continually need to raise capital for growth is dangerous because the capital markets can turn on you extremely quickly. 

I think SunPower and First Solar are still a cut above the rest in the solar industry, and their profitable businesses will be able to withstand this current downturn better than competitors. Both have differentiated technology, high margins, and strong balance sheets. These advantages are the reasons why both companies have survived the turmoil that's been thrown at them over the past decade, and it's why they're the only two solar stocks I would be buying today.